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Due diligence for direct loans
Direct loans are an innovative and growing segment of
Kiva’s loan portfolio. These loans are not administered by a Field
Partner, which gives Kiva the ability to reach populations that even
microlenders can’t or don’t serve. Direct loans are made through the
digital payment system PayPal.
Direct loans were launched on Kiva in 2011 and are currently only
available to borrowers in the U.S. as we continue to learn more about
this model and the most effective ways to scale. Lenders should be
aware that direct loans often involve a higher level of risk of
default than those administered through Field Partners. The higher
risk is due in part to less monitoring and followup for collection
of repayments, as well as the nature of the businesses served. For
example, many direct Kiva borrowers are startups that are in their
first or second year of business.
Kiva’s role
To be eligible for a direct loan on Kiva, borrowers must either
be financially excluded (meaning lacking access to financial
services for their business) or creating social good through their business. Kiva
staff determine if a borrower meets one of these requirements
by assessing their loan application.
Kiva requests information about financial history from direct loan applicants, and does a series of checks to
help verify their identity, ranging from researching their
business online to confirming the PayPal information provided
by the borrower. All applicants are screened through the
Office of Foreign Assets Control terrorism database as a
security precaution.
These internal review steps are taken to help prevent fraud,
and generate a general sense of the borrower’s financial
picture, the viability of their business and its potential
social impact.
Social underwriting
In addition to the steps Kiva takes internally, direct loan applicants must also be vetted by a Kiva Trustee or members of their community in a process we call social underwriting. Social underwriting bases a borrower’s creditworthiness on the strength of their personal network and their character, which helps create a more complete picture of a borrower when considered alongside financial history.
This community-based form of due diligence is relatively new
and experimental for Kiva, but we believe that when a borrower
involves their own connections, friends and family in the loan
process, it increases their commitment to repaying their loans.
Trustees
Kiva Trustees can be community organizations or individuals.
They help Kiva identify credible direct loan applicants and
act as an encouraging force for borrowers as they apply for
and repay their loans. Trustees are character references—
they may not have experience with lending programs but they
do have a relationship with the borrower.
Kiva has a tiered system that allows Trustees to endorse more
borrowers and more loans as their recommended borrowers build
a history of successful repayment. Trustees must also maintain
a target repayment rate among their recommended borrowers in
order to continue endorsing new borrowers. Kiva does make some
exceptions when pausing Trustees with lower repayment rates
based on past working relationships.
Private fundraising period
Every direct loan borrower must also recruit members of their
own network to support their loan during a private fundraising
period before Kiva will post the loan to the public website.
The number of lenders the borrower must recruit may be set
anywhere from 5 to 30, depending on the size of the loan, the
potential social impact of the loan and whether the loan was
endorsed by a Trustee. While many borrowers do have the support
of a Trustee, borrowers are not required to have a Trustee
endorsement in order to successfully apply for a direct loan
on the Kiva website.
While Kiva is still refining this network-driven lending tool,
early results show that repayment rates do improve when
borrowers invite members of their own communities to support
their loans. It also holds potential to help Kiva scale its
impact as we continue to expand our work and create more
economic opportunity around the globe.
Ongoing monitoring
When a direct loan borrower is behind on repayment, Kiva
follows up with multiple repayment reminders, phone calls and
emails in order to encourage repayment.
Trustees are expected to encourage borrowers they endorse to
repay their loans, though they are not expected to put in the
same level of effort or diligence as a Kiva Field Partner.
Kiva monitors direct loan repayment rates and will adjust a
Trustee’s ability to endorse borrowers based on the historical
success of borrowers recommended by the Trustee.
Direct loan borrowers who fail to repay or end up defaulting
on their loan are not eligible for future Kiva loans. Direct
loans are generally defaulted when the total amount repaid is less than
the total amount expected as of 6 months prior.
At the moment, loans are defaulted on a monthly basis and
contributing lenders are notified by email. Kiva reserves the
right to exempt loans from default if extenuating circumstances
are found, or if we believe there is a high likelihood of
future repayment. When a loan is defaulted, any amount not
repaid should be considered a loss by contributing lenders.
While borrowers are still allowed to make repayments after
their loan has been defaulted, Kiva does not have the
resources to follow up with these borrowers to encourage
future repayments.